Perspectives: Wealth Planning Group Newsletter

Private Banking USA

Perspectives Wealth Planning Group Newsletter

July 2012

CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.

Dear Clients:

Welcome to the most recent edition of Perspectives, our wealth planning periodical. In this edition we hope to focus your attention on the ability to implement significant estate and gift tax planning this year.

For the remainder of 2012, individuals have the opportunity to effect intra-family giving plans at a level we may not see again. We are at a uniquely beneficial point historically to make gifts to family members, or to trusts for their benefit, given a). the increased amount that can be given at $5.12M per individual or $10.24M for a couple, b). historically low interest rates, c). depressed valuations for most asset classes and d). permissible planning strategies including FLPs, GRATs and valuation discounts.

In light of current legislation, this window of opportunity will close at the end of this year and we hope this edition of Perspectives will spur you to review your estate plans with your tax and legal advisors.

Sincerely,

Bill Woodson Managing Director, Wealth Planning Group

Foreword

PRIVATE BANKING USA

William I. Woodson (Bill)

Bill Woodson is the Managing Director for Credit Suisse’s Family Wealth Management Group, a 35-person practice that provides global investment consulting and family office services to wealthy families, private foundations and endowments. Bill is also the Director of the Center for Wealth Planning, Credit Suisse’s national center-of-excellence for providing clients with assistance in the areas of estate planning, taxation, insurance, philanthropy and wealth education. Bill came to Credit Suisse from Merrill Lynch where he was a member of Merrill Lynch’s Private Banking and Investment Group and oversaw an integrated investment advisory practice for ultra-high net worth families ranging in net worth from $25 million to $2 billion. Prior to joining Merrill Lynch, Bill was one of the first ten employees at myCFO, an integrated wealth management and technology firm started by Jim Clark (Netscape) and John Chambers (Cisco Systems). At myCFO, Bill ran one of the firm’s largest multi-family, family office practices and served as the CFO for myCFO Securities, LLC. Bill also worked as the head of a large multi-national family office with 40 employees and offices in Hong Kong, Vancouver and San Francisco. Bill began his career as a CPA at Arthur Andersen, where he spent a decade providing domestic and international tax advice to wealthy executives, families and business owners. Bill has a master’s degree in accounting from New York University’s Stern Graduate School of Business and a bachelor’s degree in economics from the University of California, Irvine. He is a frequent lecturer on wealth management and has published a number of articles on the subject. Bill co-founded and is a past president of First Graduate, a mentoring charity that helps young people finish high school and become the first in their families to graduate from college. He also served on the board of The Fulfillment Fund, a college access program for inner-city school children. Bill is a current or past member of the American Institute of Certified Public Accountants (AICPA), the Hoover Institution at Stanford University, the San Francisco and Chicago Estate Planning Councils, the Woodside School Foundation, the Investment Management Consultant’s Association, and Beta Gamma Sigma (the national honor society for graduate business schools).

The Private Banking USA business in Credit Suisse Securities (USA) LLC is a regulated broker-dealer and investment adviser. It is not a chartered bank, trust company or depository institution. It is not authorized to accept deposits or provide corporate trust services and it is not licensed or regulated by any state or federal banking authority.

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Dear Clients:

As we are now into the second half of 2012, an overview of our current estate and tax landscape as well as a discussion regarding estate and tax planning considerations is in order.

The Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010 (the “Act”) created significant changes in the area of wealth transfer planning. Most notably, the Act increased the federal Estate, Gift and GST tax exemption amount for years 2011 and 2012 and reduced the transfer tax rate.

The Estate, Gift and GST exemption amount for 2012 is $5.12M per individual, $10.24M per married couple (as adjusted for inflation). The Estate, Gift and GST tax rate is 35% for 2012. As of the time of this publication, it is unclear whether these increased benefits will ultimately be extended, reduced or eliminated. Because of the uncertainty, clients should seriously consider taking advantage of this benefit as the year progresses. Without further Congressional action, beginning in 2013, the Estate, Gift and GST exemption amount will decrease to $1M (with adjustments for inflation for the GST exemption) and the transfer tax rate will increase to a maximum rate of 55% with a surcharge for larger estates.

The combination of increased exemption amount, decreased tax rate, low interest rate, and relatively low asset values makes this an opportune time for wealth transfer planning.

In the following pages, we discuss numerous planning considerations that may assist you in transferring substantial wealth to your beneficiaries in an efficient manner. Although not all of the planning vehicles discussed may be relevant to your particular situation, simply being aware of your options should better prepare you for planning discussions with your legal and tax advisors.

We hope that the information provided is helpful and informative.

With warmest regards,

Alpa Panchal West Coast Head, Wealth Planning Group

Editor’s Note

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4 CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.4

Estate Planning Opportunities

5 > Overview of Wealth Transfer Planning Opportunities

8 > Planning with Family Limited Partnerships in 2012

12 > Utilizing the Increased Exemption with a Spousal Lifetime Access Trust (SLAT)

13 > Determining Basis for Gifted and Inherited Property

Tax Updates

14 > The Landscape for Taxes: 2012 and 2013

15 > Summary of Key Stated Positions on Taxes Affecting Clients

15 > 2012 Federal Gift/Estate/Retirement Contribution Amounts

16 > 2012 Federal Individual Income Tax Brackets

16 > Income Tax Summary 2010–2013

16 > Estate Tax Law Summary 2010–2013

Insurance

17 > Opportunities for Life Insurance in 2012

Cyber Security

19 > Cyber Security Concerns and the High Net-Worth Family Office

In This Issue

CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors. 5

the estate and gift tax. In 2012, the GST exemption increased to $5.12M per individual (or $10.24M per married couple). Therefore, a grandparent may wish to consider making gifts to grandchildren, whether outright or in a GST trust, to take advantage of the increased exemption. In a properly structured GST trust, assets held in the trust and any future income and appreciation could effectively be shielded from future estate or GST tax. In certain jurisdictions, this type of generation-skipping trust can continue in perpetuity (the so-called “Dynasty Trust”), thereby potentially extending the tax benefits for future generations.(4)

Sale to an Intentionally Defective Grantor Trust

One effective strategy to leverage the increased gift and GST exemption amount is the use of a sale to an intentionally defective grantor trust (“IDGT”). Due to the nature of this structure, the IDGT is typically the strategy of choice for GST planning.

In this strategy, the grantor creates an irrevocable trust and typically funds the trust with a gift of cash. The size of the gift is often determined by the size of the transaction. The trust then purchases an asset with high growth potential from the grantor in exchange for an installment note. The note must include an interest rate equal to at least the monthly Applicable Federal Rate (“AFR”) in effect at the time of funding. If the trust assets grow beyond the AFR, then the excess appreciation could pass to the beneficiaries of the trust without further transfer tax.

For additional leverage, the grantor could sell assets, which qualify for a valuation discount (e.g., interests in a family limited partnership). If the grantor dies during the term of the note, then the fair market value of the note (to the extent the loan has not been repaid) is included in the grantor’s estate. That value may sometimes be less than the outstanding principal depending on several factors.

(4) The Obama Administration Fiscal Year 2012 Revenue Proposals include a provision that would limit the use of the Dynasty Trust structure to a maximum of 90 years.

Overview of Wealth Transfer Planning Opportunities

Lifetime Gifting

The lifetime gift tax exemption increased to $5.12M per individual (or $10.24M per married couple). This means that an individual who has not yet utilized his or her lifetime gift tax exemption may now gift up to $5.12M (or $10.24M per married couple) without incurring federal gift tax(1). An individual who has previously used his or her $1M lifetime gift tax exemption now has the opportunity to make an additional gift of $4.12M (or $8.24M per married couple) without incurring federal gift tax. Additionally, the top gift tax rate has been reduced from 45% to 35%.

There are several significant tax advantages to lifetime gifting. First, the asset gifted could be removed from the donor’s estate. Second, any future income and appreciation associated with the gifted asset could also be removed from the donor’s estate. Third, the gift tax is generally more efficient from a tax perspective due to the nature of how the estate and gift tax are calculated. For example, a client who wishes to make a lifetime gift of $1M to his or her children would need to have $1.35M to do so ($1M gift and a federal gift tax of $350,000)(2). In contrast, a client who bequeaths $1M at death to his or her children would need approximately $1,538,462 to do so ($1M bequest and a federal estate tax of approximately $538,462)(3). The reason for this disparity is that the gift tax is tax-exclusive, meaning it is calculated exclusive of the gift tax owed. The estate tax, on the other hand, is tax-inclusive, meaning that it is calculated inclusive of the estate tax owed. In other words, there is an estate tax imposed on the amount of estate tax to be paid.

In addition, the use of lifetime gifts may also save state transfer taxes because many states, such as New York, impose a separate estate tax but not a separate gift tax.

Lifetime Gifting to Grandchildren

The Generation-Skipping Transfer (“GST”) tax is a tax that is imposed on transfers to grandchildren or younger generations (or trusts for their benefit). This is a separate tax in addition to

(1) Note that a small number of states impose a separate gift tax and the exemption amount may be lower than the federal exemption. Individuals should check with their counsel regarding their particular state gift, inheritance and estate tax rules.

(2) Assuming the current 35% federal gift tax rate and no use of the lifetime gift tax exemption amount.

(3) Assuming the current 35% federal estate tax rate and no use of the estate tax exemption.


The IDGT is considered a grantor trust for income tax purposes. Therefore, the grantor does not recognize gain or loss on the sale of assets to the IDGT. The grantor is also not taxed on the annual interest payments received from the note. In addition, the grantor is obligated to pay the income tax on the income attributed to the trust, thereby allowing the assets in the trust to more effectively grow for the benefit of the beneficiaries.

Because current AFRs are low (e.g., mid-term AFR for July 2012 is 0.92%), it may be possible to shift substantial appreciation to beneficiaries at a relatively low transfer tax cost. The increased lifetime gift and GST tax exemptions also allow for more assets to be sold without incurring an immediate gift tax. In addition, if assets sold can be discounted (i.e., due to lack of marketability, fractional interest, control, etc.), additional wealth may be transferred to beneficiaries.

Qualified Personal Residence Trust

Transferring a personal residence to a Qualified Personal Residence Trust (“QPRT”) is a popular estate planning strategy that may help reduce the size of your estate. The increased lifetime gift tax exemption and relatively low value of homes make QPRTs a popular strategy.

This strategy consists of a gift of a personal residence to an irrevocable trust. The grantor would retain the exclusive right to use and occupy the personal residence for a period of years. This retained right creates a discount on the value of the home for gift tax purposes. At the expiration of the trust term, the property in the trust would pass to the beneficiaries. The grantor could continue to live in the residence at that time with the consent from the beneficiaries and the payment of fair market rent.

An essential element to consider is the length of the term of the QPRT. This is because the grantor must survive the term of the QPRT in order for this strategy to work. If the grantor dies during the QPRT term, the value of the home is includable in the grantor’s estate and the estate planning benefits of the QPRT have not been achieved.

The transfer of fractional interests in a residence could be used to hedge against the possibility of premature death. For example, a grantor may create three QPRTs with terms of 5, 10 and 15 years. For example, if the grantor transfers a 1/3 interest in the residence to each of the trusts and if the grantor dies in year 12, only the remaining 1/3 interest is included in the grantor’s estate. Another possibility is for a married couple to create two QPRTs, each with his or her 50% interest in the

property. If one spouse dies during the term of the QPRT, then the other 50% interest in the home belonging to the surviving spouse’s QPRT could still be successful. A valuation discount may be possible due to the fractional interests involved.

During the term of the trust, the grantor is still considered the owner for income tax purposes and could receive the benefit of any income tax deductions related to the property, as well as the tax benefits associated with the sale of a principal residence.

A QPRT could be an effective strategy for individuals to transfer valuable residences to the next generation. Depressed real estate values and increased lifetime gift tax exemption could permit the transfer of potentially large amounts of wealth and future growth related to a residence to the beneficiaries at a reduced gift tax cost.

Grantor Retained Annuity Trust

Another attractive planning strategy in the current low interest rate environment is a Grantor Retained Annuity Trust (“GRAT”). Over the last couple of years, several bills were introduced in Congress to restrict the use of GRATs.

A GRAT is an irrevocable trust to which a portion of the grantor’s property is transferred with the grantor retaining the right to receive a fixed payout, or annuity, each year for the term of the trust. The GRAT must pay the required annuity each year regardless of the amount of income actually generated by the trust assets. If the trust assets do not generate sufficient income to fund the annuity amount, the trust principal must be utilized to make up any deficiency. When the trust terminates, the assets remaining in the trust pass to the beneficiaries (or a trust for their benefit) without the imposition of any additional transfer tax. However, if the grantor dies before the end of the trust term, a portion or all of the trust assets will be included in the grantor’s estate for estate tax purposes.

Upon the creation of the GRAT, the grantor is deemed to have made a gift equal to the present value of the assets that will pass to the beneficiaries at the end of the trust term. A GRAT is usually structured to set the annuity sufficiently high so that the value of the remainder interest (the value of the gift) is as close to zero as possible. The value of the annuity stream typically equals the value of the assets in the GRAT plus an imputed interest rate (the “§7520 rate”) — a rate that varies monthly, and remains in effect for the term of the GRAT once established.

The GRAT allows the transfer of appreciation in excess of

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the §7520 rate to pass to the beneficiaries without additional transfer tax. If the assets do not appreciate, all of the assets would have been returned to the grantor by the end of the GRAT term without adverse tax consequences. From an income tax perspective, all income tax liability incurred by the GRAT during its term is attributed to the grantor.

Assets that have significant potential for appreciation are ideal for GRATs. Because the current §7520 rate is low (e.g., 1.2% in July 2012), a GRAT may shift significant amount of wealth to beneficiaries at little or no transfer tax cost.

Charitable Lead Trust

For individuals who are charitably inclined, this is an ideal time to consider establishing a charitable lead trust (“CLT”). A CLT is an attractive option during the current low interest rate environment that could help optimize the increased lifetime gift tax exemption by gifting to family members and charity at the same time.

A CLT permits an individual to donate the income stream from an asset to one or more charities for a set number of years or for one or more person’s lifetime. The remaining assets of the trust, at the end of the trust term, pass to the beneficiaries (or a trust for their benefit). There are different ways to set up a CLT, either grantor or nongrantor, depending on one’s goals and objectives. A grantor CLT permits the grantor an immediate income tax deduction at the time the CLT is established. However, during the term of the CLT, the grantor would be responsible for the income tax liability of the trust. A nongrantor CLT, on the other hand, does not allow the grantor to receive an immediate income tax deduction. The trust would be liable for all income tax consequences. However, during the term of the trust, the trust would receive an income tax deduction for the income stream paid to charity.

Zeroed-out CLATs (Charitable Lead Annuity Trusts) allow the transfer of appreciation in excess of the §7520 rate to pass to the beneficiaries. Because current §7520 rates are low, CLATs are an attractive strategy for those who want to benefit family members and charities. If structured as a grantor CLT, the individual could also receive an immediate income tax benefit, which could be beneficial in a high income earning year.

Intrafamily Loan

The current low interest rate environment is an ideal time to consider loans between family members. For example, a parent may wish to lend money to a child (or a trust for the child’s

benefit). The parent must charge a minimum interest rate based on the appropriate AFR. The child can then use the borrowed money to invest for a higher return (or pay off other debt with a higher interest rate). This strategy will generally be successful if the investment returns more than the interest being charged on the note.

For individuals with existing intrafamily loans, this may be a good time to consider “refinancing” using the current lower interest rates. Others may wish to take advantage of the increased lifetime gift tax exemption and forgive any existing intrafamily loans (a forgiveness of loan is deemed a gift to the debtor).

Note Regarding Gifts in 2012

Commentators have suggested that there may be a possibility that there will be a “clawback” of the prior tax benefit. The reason for this uncertainty is based on how the estate tax is computed. In essence, the estate tax takes into account the amount of any post-1976 taxable gifts and adds it back to the taxable estate. The gift tax previously paid is then backed out of the computation. Individuals who make lifetime gifts in 2012 should be aware that because of the potential disparity in the estate, gift and GST exemption and rates in 2013 and beyond (i.e., if the exemption decreases to $1M or another amount), there is some uncertainty as to how prior gifts may be treated.

However, even assuming a clawback applies, donors who elect to use their $5.12M gift (and GST) tax exemptions in 2012 should be no worse off than those who pass away without having made those gifts. In fact, there may be benefits to using the $5.12M exemption in 2012. The appreciation on the gifted assets will unlikely be subject to the “clawback”, even if the gifts themselves are. Also, leveraging the gifts through some of the vehicles discussed above could enable donors to transfer appreciation on assets in excess of the $5.12M exemption.

Conclusion

Even if additional gifting is not in your current plans, it is critical to review your current estate plan to ensure that it is consistent with existing law and your current wishes, in light of recent changes to legislation. In addition, the increased estate, gift and GST exemption amounts along with decreased tax rate in 2012 may create an opportunity for significant wealth transfer.

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8 CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.

Planning with Family Limited Partnerships in 2012A family limited partnership (“FLP”) is a legal structure potentially offering a number of benefits for wealthy clients who are interested in transferring a portion of their wealth to future generations of family members. Estate planners have also utilized limited liability companies (“LLCs”) for wealth transfer purposes. While the FLP structure has been used successfully by clients for many years, FLPs have been challenged by the IRS as an estate planning tool. Thus, the ability of clients to transfer their wealth through the use of FLPs largely depends upon the client’s understanding of the rules and limitations of FLP planning, as described below.

What is a Family Limited Partnership?

An FLP is a type of partnership formed by family members for a variety of tax and nontax reasons. With a typical FLP, senior members of a family (e.g. parents) transfer a portion of their investment assets to an FLP in exchange for either general partnership interests, limited partnership interests, or both.

When Should One Consider Forming an FLP?

One may consider forming an FLP in the following situations:

1. One is interested in transferring some of his or her wealth to younger generations of their family in a tax-efficient manner.

2. One wants to educate younger members of the family regarding management of the assets owned by the FLP.

3. One wants to protect the assets contributed to the FLP from the potential creditors of the FLP’s partners, including anticipated future partners such as the client’s children.

4. One has sufficient assets outside of the FLP to maintain his or her standard of living and does not need to rely upon distributions from the FLP.

5. One has nontax reasons for forming the FLP outside of estate and gift tax planning reasons (this is discussed in more detail below).

What are the Benefits of an FLP?

1. Transfers of FLP interests generate discounts against the value of the assets owned by the FLP, which may result in gift and estate tax savings. The inherent lack of marketability of the FLP interests and lack of control by the limited partners over the operation of the FLP give rise to these discounts.

2. Transferring FLP interests to family members rather than fractional interests in the actual assets owned by the FLP

allows the client to transfer the economic benefit of the FLP assets without having to divide the ownership of the assets among different individuals.

3. The FLP is a flow-through entity and, therefore, does not have to pay a separate layer of income tax. All items of partnership income, deduction, gain and loss flow through to the partners in the same proportions as their ownership in the FLP.

4. Creditors of a limited partner are generally restricted to accessing the partner’s share of distributions from the FLP, but cannot obtain voting or management rights over the FLP.

What are Some Possible Disadvantages of an FLP?

1. Although FLPs are widely used to lower estate and gift taxes through the application of valuation discounts, the IRS continues to challenge the use of FLPs to generate these discounts. Careful planning is required to avoid any potential IRS issues.

9CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.

2. If a client transfers an FLP interest during his or her lifetime, the transferee interest will not receive a step-up in the income tax basis of either the FLP interest or the transferee’s share of the FLP assets on the client’s death.

3. The client may have increased annual expenses (e.g., accountants’ and attorneys’ fees) related to the administration and tax reporting of the FLP.

Other Issues One Should Consider Before Forming an FLP

Before forming an FLP, one should also be aware of the following issues:

1. If the creation and funding of the FLP occurs too close in time to subsequent transfers of interests in the FLP, the IRS may argue that there was a “gift on formation” — essentially that the client made a gift of underlying FLP assets, rather than gifts of the discounted FLP interests to his or her family members. This may cause unintended gift tax consequences to the client. Gifts of FLP units should be made as far into the future as possible following the formation of the FLP.

2. The size of the valuation discount on the transfer of the FLP units will largely depend upon the character of the assets held by the FLP. For example, the valuation discount applicable to units of an FLP that owns liquid assets such as cash, CDs, stocks and bonds will generally be smaller than the valuation discount applicable to units of an FLP that owns non-liquid assets such as real estate. In any event, the valuation discount must be determined by a qualified appraiser. The terms of the FLP agreement, drafted by an experienced attorney, are crucial in determining the appropriate valuation discounts.

3. Care should be taken to address all other issues other than estate and gift tax planning with respect to the formation and operation of the FLP. For example, if real estate subject to a loan will be transferred to the FLP, lender consent may need to be obtained prior to the transfer so as not to trigger a “due-on-sale” clause in the loan document. If the property has been leased to tenants, lease assignments will need to be executed to reflect the new owner of the property. Property tax issues must be analyzed to ensure that the property is not reassessed upon the transfer of the property to the FLP by the partners or, thereafter, upon the transfer of partnership interests by the client to his or her family members.

Using FLPs in Estate Planning

Once the FLP has been formed and funded, the client can engage in a number of different strategies to transfer FLP interests to family

members to reduce the size of his or her taxable estate. This would be particularly relevant during the remainder of 2012 while the gift tax exemption amount is $5.12M per person ($10.24M for a married couple). The following techniques are among the most widely used, especially this year, to take advantage of the historically high gift tax exemption amounts before they expire:

1. Direct Gift of FLP Interest

FLP interests can be gifted directly to family members or trusts created for their benefit (see below). This is simple to do – most FLP agreements allow for these types of transfers without triggering a standard right of first refusal in favor of the other partners. Gifts of FLP interests should qualify for the valuation discounts discussed earlier, thus providing for greater gift and estate tax savings. If the limited partnership interests are gifted outright to individual family members, each individual will become a limited partner in the FLP and must agree to be bound by all of the terms of the FLP agreement. The client would be required to file a gift tax return to report the gift of the FLP interest. If the client does not have sufficient lifetime gift tax exemption available when the gift is made, the client may be required to pay gift tax on the gift.

2. Gift of FLP Interest to IDGT

Rather than gifting an FLP interest directly to a family member, the FLP interest could be gifted to a special type of trust known as an Intentionally Defective Grantor Trust (“IDGT”). An IDGT is an irrevocable trust generally created by the client for the benefit of a family member such as a child or grandchild. For income tax purposes, the client is taxed on all of the income generated by the IDGT, whether or not distributed to the beneficiary of the IDGT. A gift to an IDGT is an attractive option if a client does not want a beneficiary to own the FLP interest outright (for example, if the beneficiary is a minor), and/or the client desires to pay the income taxes on the income earned by the IDGT’s assets, which is tantamount to a tax-free gift to the IDGT beneficiaries of the income taxes so paid. As with the gift of an FLP interest to an individual beneficiary, a gift of an FLP interest to an IDGT would require the donor to file a gift tax return, and possibly pay gift tax on the transfer. The client may also allocate a portion of his generation-skipping transfer (“GST”) tax exemption to the transfer so that distributions from the IDGT to individuals two or more generations below the client are exempt from GST tax.


3. Sale of FLP Interest to an IDGT

The transfer could be structured as a sale of the FLP interest to an IDGT, rather than as an outright gift. In the sale transaction, the client would sell an FLP interest to an existing IDGT in exchange for a promissory note with a relatively low rate of interest (but not less than the “Applicable Federal Rate” released each month by the IRS). The term of the promissory note should generally be long enough to allow the IDGT to pay off the promissory note. The IDGT would use the income from the FLP interest it would then own to make interest and principal payments on the promissory note. This would allow the client to continue to receive an income stream from the FLP interest in the form of interest and principal payments on the promissory note. In addition, all of the appreciation of the FLP interest after the sale would be removed from the client’s estate, with the client only retaining in the client’s taxable estate the value of the note that has not been paid at death. Often the trust is funded with a seed money gift of at least 10% of the total sale to assure that the note is respected as bona fide debt; clients should consult with counsel on this step and the corresponding gift tax consequences.

4. Transfer of FLP Interest to a GRAT

One may also transfer all or a portion of his or her FLP interest to a special trust called a Grantor Retained Annuity Trust

(“GRAT”). The GRAT is designed to pay an annuity back to the client for a set number of years. The annuity payment can be in the form of cash (generated from the income of the FLP interest), FLP units, or a combination of the two. The goal of using a GRAT in this context is to pay back to the client the entire value of the FLP interest initially contributed by the client to the GRAT, plus a rate of interest established by the IRS (currently 1.2% for June 2012). At the end of the term of the GRAT, any appreciation on the FLP interest in excess of the specified interest rate would be distributed free of gift and estate tax to the grantor’s designated family members or trusts for their benefit.

Avoiding IRS Challenges on FLP Discounts

Over the years the IRS has repeatedly — and often successfully — challenged the use of FLPs in estate planning. Specifically, the IRS has attempted to reduce or eliminate the valuation discounts taken by taxpayers on the transfer of FLP interests reported on estate and gift tax returns. If the valuation discounts are ignored, the client would be treated as if he or she had transferred the full fair market value of the underlying FLP assets (in the case of a gift or sale of the FLP units) or as if he or she had died owning the underlying assets of the FLP, rather than the FLP interest itself.

Fortunately for those who wish to use FLPs in their own estate planning, there are a number of cases and IRS rulings that provide a


roadmap for establishing and operating an FLP to best protect the structure from an IRS challenge. One should be prepared to do the following:

1. Establish a Legitimate and Significant Nontax Reason for Forming the FLP

One should have “legitimate and significant” nontax reasons for forming the FLP other than reducing taxes by discounting asset values. For example, obtaining the creditor protection of the limited partnership entity can be a valid and significant nontax reason for transferring an asset into an FLP. Other possible nontax reasons include: 1) allowing for the joint management of family investment assets, 2) allowing for gifts of partnership interests to family members rather than fractionalized interests in the underlying FLP assets, 3) providing for a single pool of assets that would allow the partners access to other investment opportunities that would not otherwise be available to them, 4) providing a mechanism to resolve disputes among the various family members relating to the FLP property, and 5) continuing to keep ownership of the FLP assets within the family by restricting the rights of non-family members to the assets.

2. Observe Partnership Formalities

One should treat the partnership as an actual business. If basic partnership formalities are not followed, the IRS may not respect the partnership as a legitimate business entity. Separate books and records for the FLP should be kept. Required state filing should be made on time. A separate bank account for the FLP should be established, and partnership assets should not be commingled with assets of any partner. The partners should attend regular meetings and minutes of those meetings should be recorded. Decisions regarding the management of the FLP assets should be made by the general partner only. Distributions to partners should be made in accordance with the terms of the FLP agreement and in the same proportionate interest as the partners’ ownership in the FLP.

3. Forego Unrestricted Control and Access of Assets Transferred to FLP

One should not transfer substantially all of his or her assets to the FLP, nor should the client have the need for the income of the FLP to pay his or her current or future liabilities (including anticipated estate and gift taxes). The client should retain enough assets outside of the FLP to support his or her standard of living independent of any potential income from the FLP. The client should only transfer investment or business assets to the FLP. Personal use assets, such as personal residences

or automobiles, should not be transferred. The IRS has been successful in invalidating FLPs in numerous cases where the donor/decedent operated the FLP as his or her personal checkbook, as if the assets were still owned by the donor/decedent in his or her own name. Neither should the client remain in control of the FLP as its general partner without full knowledge and understanding that the IRS could seek to pull back into the client’s taxable estate the full value of the FLP interests gifted or sold, notwithstanding such gift or sale, by virtue of such retained control.

Conclusion

If one closely follows the rules of forming, funding and operating an FLP, the FLP can be a viable and effective estate planning strategy. Anyone considering the FLP strategy should consult with his or her professional advisors, including estate planning counsel experienced in the use of FLPs.

Article contributed by Robert Strauss and Jeffrey Geida the law firm of Weinstock, Manion, Reisman, Shore, & Neumann. For over 50 years, the law firm of Weinstock, Manion, Reisman, Shore & Neumann, a Law Corporation, has provided assistance and counsel in the areas of estate planning, probate and trust administration, general business and corporate law, taxation, real estate, trust and estate, and litigation..


Utilizing the Increased Exemption with a Spousal Lifetime Access Trust (SLAT)While many high net-worth married couples may like to take advantage of the gift tax exemption this year ($5.12M per individual or $10.24M per married couple), they may be reluctant to do so because they lose access to the gifted property’s income and principal. A Spousal Lifetime Access Trust (“SLAT”) may help accomplish the goal of utilizing the increased exemption amount while retaining certain income and principal rights from the trust.

In general terms, a SLAT is an irrevocable trust set up by one spouse for the benefit of the other spouse/children/grandchildren/other beneficiaries. For example, assume a husband creates a SLAT for the benefit of his wife and funds it with his $5.12M gift tax exemption and also allocates his Generation Skipping Transfer (GST) exemption to the gift. During the wife’s lifetime, the Trustee (who may be the wife, but it is suggested to have a non-spouse serve as a Co-Trustee) can distribute to the wife, income and principal as needed for her health, education, maintenance and support. The wife can also be given the power to withdraw the greater of $5,000 or 5% of the trust principal annually, and a testamentary limited power of appointment to “rewrite” the trust provisions upon her death. When the wife passes away, the unappointed trust property (including the appreciation thereon) passes —

estate tax free — to the children or possibly even more remote descendants depending on state law. An added benefit of a SLAT is that it can protect the beneficiaries from creditors, including ex-spouses.

Caveats include that upon the wife’s death, the husband loses his indirect access to the trust’s income and principal. One solution to this problem is to have the wife create an Irrevocable Life Insurance Trust (“ILIT”), for the benefit of her husband. The ILIT could be funded to purchase a life insurance policy on the wife’s life to “replace” the wealth lost to the husband in the SLAT (in the event he survives his wife). If necessary, the SLAT can loan the ILIT the funds needed to pay premiums under a split-dollar arrangement. Additionally, in the event of a divorce, the husband would lose access to the trust income and principal.

The question often comes up as to whether a married couple can both create SLATs (and ILITs) for the benefit of each other so as to increase the gift to $10.24M. Although possible, the IRS could look through the transactions and apply the reciprocal trust doctrine. That doctrine assumes that each spouse established a trust for his/her own benefit, thus resulting in estate inclusion for each spouse of the trust property. Accordingly, the trusts must be drafted differently. Estate Planning counsel can review the ways in which the trusts can be drafted different enough so as to help avoid estate inclusion of those assets.

SLAT

Children

Husband

Children

Wife

Grandchildren Grandchildren

Lifetime Gift / GST

Wife Husband $5,120,000 $5,120,000 SLAT

SLAT Diagram


Determining Basis for Gifted and Inherited PropertyMore and more individuals are considering gifting this year given the increased lifetime gifting exemption ($5.12M per person). A common question that arises when gifting transactions are considered is – what happens to the basis of the property being gifted?

Generally, lifetime gifts receive carryover basis. This means that the basis of the property in the hands of the donee (the person receiving the gift) is the same as that in the hands of the donor (the person giving the gift). In addition, the donee gets to tack on the donor’s holding period. For example, Mom purchased a share of stock more than one year ago for a price of $100. Mom now gifts the stock to Daughter. Daughter’s basis in the stock would be $100 and if she were to sell the stock the next day for $110, she would recognize long term capital gain of $10 because she would receive the benefit of Mom’s holding period. In contrast, bequests at death generally receive a step-up in basis to the fair market value at the date of death (unless alternate valuation is elected) and subsequent sale will always be long term capital gain (regardless of how long the decedent has held the property). For example, Mom purchased a share of stock for $100 and Mom passes away the next month when the stock is worth $150. In Mom’s will, she bequeaths the stock to Daughter. Daughter’s basis in the stock would be $150 and if she were to sell the stock the next day for $170, she would recognize long term capital gain of $20.

There are several exceptions to the above rules. First, if a donor made a gift in excess of his/her lifetime gift tax exemption and pays a gift tax, then the donee’s basis in the gift would be increased by a proportionate amount of the gift tax paid that is attributable to the net appreciation on the property.

Second, if a donor made a gift to a donee that subsequently dies within one year of the gift, and that donee bequeaths the property back to the donor, then there would be no step-up in basis at death. Instead, the donor receives the property back at its original basis. This is done to avoid the so-called “death bed gift.” For example, Dad gifted Son property with basis of $100 and Son passes away within a year of that gift. At the time of Son’s death, the property was worth $150. Son’s will bequeathed the property back to Dad. In this case, Dad’s basis in the property would be $100.

The third exception is perhaps the most applicable in these economic times – special rules apply to gifts of property that have decreased in value (e.g., property with a fair market value lower than basis). In this case, the donee’s basis depends on whether there will be a gain or loss. For purposes of determining loss, the

donee’s basis is the fair market value of the property at the time of gift. For purposes of determining gain, the donee’s basis is the adjusted basis in the hands of the donor. For example, Mom purchased a share of stock for $100. The stock has since dropped in value to $80. Mom now gifts the stock to Daughter. If Daughter were to sell the stock for $70, she would have a loss of $10 because she must use the fair market value at the time of the gift as her basis to calculate the loss. On the other hand, if Daughter were to sell the stock for $130, then she would have a gain of $30 because she must use Mom’s adjusted basis as her basis to calculate the gain. If the sale price falls between the donor’s basis and fair market value at the time of gift, then there is no gain or loss realized. Therefore, it is generally recommended that the donor in this case sell the property to recognize the loss and then make a gift of the sale proceeds to the donee.

In regard to large gifts, clients often choose to utilize a trust structure (as opposed to outright gifts) for flexibility, tax efficiency and asset protection. A trust is a separate legal entity and often a separate taxpayer. Therefore, the same rules discussed above apply when determining the basis of the gifted property in the hands of the trust. In the case of a grantor trust, the trust is disregarded and the trust and the grantor are considered the same entity for income taxes purposes. Therefore, the basis of the property remains unchanged. Similarly, if the grantor were to sell property to the grantor trust, there would be no realization of gain or loss and the basis of the property sold remains unchanged.

This is a great year for clients to make gifts due to the favorable tax environment. Clients with depreciated assets might take advantage of this opportunity to gift such assets to their children to maximize the use of their increased lifetime gift tax exemption. An understanding of the basis rules is important to the future generation as they contemplate investment options.


The Landscape for Taxes: 2012 and 2013The past few years have involved landmark changes in estate, gift, and income tax treatments. Many of these changes were implemented on a temporary basis set to expire December 31, 2012. In this time of uncertainty, many clients look for direction in tax planning due to the possibility that tax laws may change significantly in 2013. Exploring the tax reform proposals of the campaign promises of Mitt Romney, President Obama’s 2013 budget proposals, and current legislation help provide insight into possible outcomes.

1. Current Tax Laws

We are well into 2012, and it is unlikely we will see significant changes in tax laws affecting clients this year. Much of this year’s rates are a result of extensions passed in 2010, and it is unlikely to see a two-year extension cut short during an election year. It is also unlikely that there would be enough time after the elections to implement significant changes, and from a practical sense, it would be easier to focus on all of the changes in 2013 or beyond. The maximum ordinary income tax rates are at 35%, long term capital gains and qualified dividends remain at 15%, and an increased estate, gift, and GST exemption at $5.12M at a 35% rate. All of the preceding rates and limits are set to expire December 31, 2012.

2. As Legislated for 2013

The 2012 tax rates are indirectly a result of President Bush’s tax packages passed in 2001 and 2003. The laws enacted lowered tax rates, but on an initial limited time period. As 2010 approached, rather than reform the tax code, Congress passed a mix of 2-year income tax extensions and temporarily modified the estate/gift tax laws. As we near the end of the 2-year extension period, without further Congressional action, we will effectively revert to 2001 tax laws with a few modifications. Namely, top ordinary income tax rates will revert to 39.6%, long term capital gain rates will revert to 20%, and all dividends (including qualified dividends) will be taxed as ordinary income. A new tax, the Medicare surtax, is 3.8% on net investment income, which effectively makes capital gains on larger transactions 23.8%. In addition, the estate and gift tax exemption will revert from the current $5.12M to $1M, with a 55% rate.

3. President Obama’s 2013 Budget/Proposals

Overall, the budget contains many of the reversions that are

slated to take place, but made applicable only to the higher income earners (households with greater than $250,000 adjusted gross income). The budget favors a top rate of 39.6%, long term capital gains at 20%, and qualified dividends taxed at ordinary income rates. The President’s proposal limits itemized deductions to 28%, which for a taxpayer in the 39.6% bracket represents a potential 11.6% rate differential on the value of itemized deductions (such as mortgage interest or charitable contributions). The estate tax and gift tax rates however, would revert to 2009 levels, which allow for a $3.5M estate and GST tax exemption, $1M gift tax exemption and 45% rate.

4. Mitt Romney

GOP Candidate Mitt Romney favors lower income taxes, repealing the AMT (Alternative Minimum Tax) and repealing estate tax. No mention is made with regard to what would happen to the gift tax. His campaign proposals include lowering all income tax brackets by 20% from current levels so that the top ordinary tax rate would be 28%. Long term capital gains and dividends for higher income earners would remain the same as today at 15%. Investment income would be exempt from tax for married households earning less than $200,000.

5. 2013 Outlook

Given the polls, many experts predict we will continue to have a divided government; the Republicans may keep control of the House and may take control of the Senate, and President Obama may be re-elected. Many experts also predict tax rates for upper income earners will rise, at least until a more comprehensive tax overhaul can be addressed in 2013 or 2014. Again, there is also a possibility that the current laws will be extended for one additional year, in order for a more thorough legislative package to be executed.


2012 Federal Gift/Estate/Retirement Contribution Amounts

Candidates Ordinary Income Brackets Long-term Capital Gains/Qualified Divi-dend Rate

AMT Estate Tax Other

As Currently Legislated Brackets return to 2001 levels (39.6% top rate)

20% capital gains (18% if purchased after 12/31/00 and held for more than 5 years), ordinary income on dividends

Assumed AMT patch

Revert to 2001 rates ($1M exemption, 55% rate)

Additional 3.8% Medicare surtax on investment income

Pres. Obama (2013 Budget)

Allow 39.6% and 36% brackets to return for incomes over $250,000 (married filers)

20% capital gains, ordinary income on dividends for higher income earners

3 year AMT patch Maintain 2009 rates ($3.5M exemption, 45% rate)

Limit itemized deduc-tions to 28%

Mitt Romney Reduce all current rates by 20%; top bracket to be 28%

0% capital gains, dividends, and interest for married filers earning less than $200,000; 15% capital gains and dividends for higher income earners

Repeal AMT Repeal estate tax

Sources: Bloomberg BNA, Tax Policy Center, Department of Treasury

Annual exclusion gift per donee $13,000

Estate tax exemption / GST per individual $5,120,000

Lifetime gift exemption $5,120,000

GST exemption per individual $5,120,000

Traditional & Roth IRA deductible contribution max $5,000

Age 50+ $6,000

401K / 403b deferral max $17,000

Catch-up contribution (age 50+) $5,500

Annual gift tax exemption for gifts to non-US citizen spouses $139,000

Summary of Key Stated Positions on Taxes Affecting Clients


2012 Federal Individual Income Tax BracketsSingle Married filing joint

Taxable income is

over

But not over

The tax is Plus Of the amount

over

Taxable income is

over

But not over

The tax is Plus Of the amount

over

$0 $8,700 $0 10% $0 $0 $17,400 $0 10% $0

$8,700 $35,350 $870 15% $8,700 $17,400 $70,700 $1,740 15% $17,400

$35,350 $85,650 $4,867.50 25% $35,350 $70,700 $142,700 $9,735 25% $70,700

$85,650 $178,650 $17,442.50 28% $85,650 $142,700 $217,450 $27,735 28% $142,700

$178,650 $388,350 $43,482.50 33% $178,650 $217,450 $388,350 $48,665 33% $217,450

$388,350 $112,683.50 35% $388,350 $388,350 $105,062 35% $388,350

Tax Law Summary 2010–2013Recent tax law changes have made long-term tax and estate planning more challenging. Clients are inquiring as to what the current and expiring laws will mean for them. The following two charts highlight the changes over the next few years.

Income Tax Summary 2010–20132010 2011 2012 2013

Top Federal Tax Bracket 35% 35% 35% 39.6%

Qualified Dividends 15% 15% 15% Ordinary Income

Long-Term Capital Gain Rate 15% 15% 15% 20%

Medicare Tax on Investment Income

N/A N/A N/A 3.8%

Add’l Medicare Tax on Wages N/A N/A N/A 0.9%

New QSBS (Qualified Small Business Stock) Acquired

75% gain exclusion taxed at 28% rate for QSBS acquired after 2/17/09 and before 9/26/10. 100% gain exclusion up to $10MM after 9/26/10

100% gain exclusion up to $10MM for stock acquired after 9/26/10 and before 1/1/12

50% gain exclusion, taxed at 28% rate

50% gain exclusion, taxed at 28% rate

Estate Tax Summary 2010–20132010 2011 2012 2013

Top Estate Tax Rate 35% with full step-up in basis, or election for 0% estate tax

but apply limited basis step-up amounts below

35% 35% 55%

GST Tax Rate 0% 35% 35% 55%

Estate and GST Tax Exemp-tion

$5MM $5MM $5.12MM* $1MM (GST exemption subject to inflation adjust-

ment)

Lifetime Gift Exemption $1MM $5MM $5.12MM* $1MM

Annual Gift Exclusion $13,000 $13,000 $13,000 $13,000 (subject to infla-tion adjustment)

Basis Step-up of $1.3MM (additional $3MM step-up to surviving spouse). Carryover basis for remainder of assets

Full step-up in basis Full step-up in basis Full step-up in basis

*Inflation adjustment applied


Opportunities for Life Insurance in 2012The tax legislation passed in late 2010 has provided one of the most important estate planning opportunities for high net-worth individuals that has ever existed – the opportunity for each individual to shift up to $5.12M out of his or her estates tax-free. Although there are many ways to take advantage of the increased gift tax exemption in 2012, the possibility of upgrading, pre-paying and guaranteeing life insurance coverage for estate planning purposes is proving to be more popular. Below are some case studies that provide ideas on how individuals are taking advantage of the increased gift tax exemption with life insurance.

For those who have existing individually-owned life insurance policies, the increased gift tax exemption in 2012 can provide an opportunity to easily shift the insurance (and underlying cash value) out of the estate tax-free.

Before the $5.12M gift tax exemption was available, the only way to purchase life insurance within an irrevocable trust without incurring additional gift tax for those who had already utilized their previous exemption amount was to utilize complicated techniques that had the effect of minimizing the amount of premiums that could be paid into a policy each year, minimizing the amount of death benefit that could be purchased and stretching the funding over a long period of time.

With the increased exemption amount, high net-worth individuals have an opportunity in 2012 to “pre-pay” or fully fund insurance policies with face amounts large enough to satisfy expected estate tax liabilities.

Case Study #1Reduce Taxable Estate by Transferring Existing PoliciesAn individually-owned policy that was originally issued in 1995 and required annual premiums of $71,000 was reviewed by our

team. At the time, the insured(s) ages were 73 and 67, the policy had a cash surrender value of $1.05M and a death benefit

of $20M. The audit revealed that at the then current interest crediting rate, the policy would lapse at ages 86 and 80 – a

terrible result.

Utilizing a portion of their increased gift tax exemption (the policyholders had already used their previous gift tax exemptions of

$1M each), the policyholders were able to transfer the policy and cash sufficient to fund the policy to age 120 to a newly formed

irrevocable trust for the benefit of their children gift tax-free. Importantly, the policy proceeds will not be subject to estate tax –

assuming that both insureds survive for 3 years after the transfer.

Case Study #2Fully Fund Policies to Provide Estate Tax LiquidityA 50 year old couple had a $100M estate, most of which was generated through the sale of a closely-held business. Even with

nominal growth of the estate, the couple anticipated a future estate tax liability of at least $50M.

Using the current exemption amount, the couple was able to transfer approximately $3M (or approximately 3% of their net worth)

into trust tax-free, which was then used to pay a single premium on a $50M survivorship contract. As a result, the couple was

able to ensure a replacement for the wealth they expected to lose to estate taxes in exchange for a relatively small portion of

their current net worth. Without the increased exemption amount, this strategy would have required an additional outlay in gift

taxes of over $1M.


A common challenge of families with significant assets is balancing philanthropy and the appropriate level of inheritance for future generations. Life insurance has been used for years to address this challenge in the form of the “zero estate tax plan”, the object of which is to avoid all taxes at death. This is accomplished by the purchase of a specific amount of life insurance for the benefit of children and other family and a specific bequest of the entire taxable estate to charity – often a family foundation.

As the case studies above illustrate, the use of life insurance to utilize an individual’s $5.12M exemption amount in 2012 can be a powerful and effective way to accomplish both tax and non-tax planning goals.

Considering all of the above, it is important to perform a “life insurance audit” before the end of the year to determine if your existing coverage is structured to take advantage of this year’s unique gifting opportunity and to assess whether additional life insurance planning is necessary.

Article contributed by John Meisenbach, founder and CEO of MCM. Since 1961, MCM has partnered with organizations and high net-worth individuals to develop and implement long-term strategic solutions to meet personal and business goals. MCM provides objective consulting across multiple business lines, delivering expertise in insurance advisory, employee benefits, executive benefits, retirement plans, and property and casualty.

Case Study #4Zero Estate Tax PlanA couple with three children was strongly motivated to provide for charity and also wanted to ensure their children were taken care

of upon the surviving spouse’s death. Though they had a net worth of approximately $100M and were capable of accomplishing

both objectives, they realized that by avoiding estate taxes, they would be able to provide significantly more to charity. As a result,

they were able to utilize $5M of their exemption to provide a tax-free gift into a trust and purchase a $10M policy for the benefit

of their children. At the same time, their estate planning documents were revised to ensure that the entirety of their taxable estate

was to pass to a private foundation managed by their children.

Case Study #3Fully Fund Policies to Guarantee InheritanceA couple, ages 65 and 60, were concerned that although they had a significant estate of $50M, a long life, poor investment

performance or unexpected medical expenses could leave them unable to provide an inheritance to their children. As a result,

they were unwilling to engage in a lifestyle that they otherwise could afford.

The increased exemption amount available to this couple in 2012 was successfully used to fully fund a guaranteed inheritance

for their children by purchasing a $10M “no lapse guarantee” survivorship life insurance contract through a one-time tax-free gift

of $1.6M into a trust. Purchasing insurance with guarantees allowed for greater peace of mind for the couple knowing that an

inheritance would be available to their families without the risks of extenuating factors.


Cyber Security Concerns and the High Net-Worth Family OfficeThe digitally interconnected nature of our society extends throughout the range of human activities, spanning social communication, family member interaction, business networking, education, financial transactions, medical care and travel. Moreover, these information exchanges are now proliferating across mobile networks, and highly private information is managed and moved across the internet by a diverse cast of characters (banks, telecommunications companies, media conglomerates, technology firms, etc.). The intersection of these layers of “connectedness” each represents a potential point of vulnerability. Many of these vulnerabilities can be mitigated by changes in user behavior. These changes have to be based on an understanding of how your behavior makes a difference.

Protecting and Educating Minors

Educating your family members and your staff on how their digital decisions affect the family’s virtual and physical security is critical. High net-worth families may have a higher public profile to begin with, and represent an interesting news subject for a content hungry public. This means that your information will be more likely to be sought after than the average internet user. Education must include younger family members as well. Children are less aware of the potential dangers of over sharing information and more influenced by peers who encourage such decisions for social reasons. Even mature teens can fail to understand the very real risks of sharing personal information via social media (see sidebar).

One fifth of all registered Facebook accounts belong to people under the age of 17. Children are passionate about networking and rarely consider the dangers of over sharing family information. Additionally, poor understanding of privacy settings, and the desire to compete socially can lead to bad decisions about online personal conduct. This avenue of family data is specifically targeted by cyber stalkers who rely on the digital garrulity of children to obtain personal information for a variety of potentially criminal purposes, ranging from sexual predation, bullying, extortion, kidnap or financial data. Changing the way minors think about their online behavior has to happen deliberately, and education is one component. Monitoring online behavior is also beneficial, and can be negotiated with your family.

Location Based Services Can Be A Special Hazard

The proliferation of Global Positioning Services (GPS) technology in our personal and business devices offers tremendous advantages. It also is a source of great vulnerability. This can manifest in a variety of ways. Two of the most serious for potential cyber stalking are social media games and digital pictures. Social media games which encourage “check in’s”, track the physical behavior of family members who “like” cafes, movie theaters, schools, malls etc. Pictures taken with modern devices include special, hidden information (called EXIF data) which records the date, time, location, device type etc. allowing the possessor of the image to easily track the subject. Staff and family members need to be aware that they are participating in games and that images which they post should be first scrubbed of EXIF data.

In April 2011, Ivan Kaspersky, son of the multi-millionaire founder of Russian internet security firm Kaspersky Software, was kidnapped and held for five days before being rescued by Special Forces and police. A college student, he was abducted while commuting to his internship at a technology company. Ivan was very active in social media, and subsequent debriefing of his captors revealed that he was targeted due to the combination of his father’s wealth and the readily available detailed information about his routine and his family posted by Ivan in social medial site Vkontakte. Source: Evgeny Kaspersky, May 2011


Staff and Business Processes Create Vulnerabilities

“On the go” families rely on their staff for variety of services, from routine chores to extended travel support to reconciling financial transactions. These kinds of services often have an online component that can ease complexity or increase the business flexibility for the family. As the use of these services increases, the desire for even greater speed and convenience may lead to inadvertent information disclosure since each service provider hosts a small portion of your “family picture”. It is important that the family office consistently conceal the identity of its principals where ever possible when establishing or using internet conveniences (dry cleaning, ticket booking, limousine service, etc.). Staff should be trained in this requirement, and the relevant family office business policy should be periodically audited.

Vulnerabilities can be exploited in a number of ways. Family offices which permit employees to use their own devices to conduct family business apart from voice calls, or to be responsible for managing the configuration of family issued mobile PCs and phones are further at risk. This is because high net-worth families can be specifically targeted for internet enabled fraud schemes. “Spear phishing”, or the application of highly tailored fraudulent communications, can appear to come from trusted members of the family network and can be hard to detect, especially by staff members who do not have first-hand acquaintance with the misrepresented person or company.

Mitigating online, targeted fraud requires family and staff education. All staff and adult family members should have a basic understanding of how common fraud schemes work. Fundamental online hygiene should be taught and followed, from avoiding certain categories of websites, (gambling, adult sites and related sites) to never clicking on links sent via email. When in doubt, it is much safer to call or text your contact to see if the linked information is legitimate. All of the internet devices used by staff and family should have up to date protections, and include precautions such as screen locks, remote tracking and data destruction capabilities (in the event of loss).

Balance Access and Protection

Every family is different, and there is no one size fits all solution. This article, intended for the principals and family office managers, is intended to plainly communicate some risks relating to cyber security. However, the benefits and pleasures of online interaction are valuable, so each family and office can find their uniquely tailored answer. As Evgeny Kaspersky, father of the kidnapped teen, said after his son was recovered, find ways to minimize risks instead of prompting minors to ignore guidelines — “Make your kids play the privacy game and be proud of protecting their family and their future.”

Factbox: 10 ways to protect your family and staff online1. Educate your family, especially minor children, on the importance

of keeping personal and “family matters” OFF social networks.

2. Never post anything online which can be used to locate your family members or staff. Keep your routines private.

3. The internet has an infinite memory. Never post something which may be a source of future liability – when unsure, DO NOT post it.

4. Monitor the office and home networks to detect misuse or unintentionally dangerous behavior.

5. The family identity should be obfuscated when using digitally enabled conveniences, even when business is conducted via staff or other proxy.

6. Practice good internet hygiene by avoiding sites known to launch malware attacks. Be skeptical of email links and file sharing — follow up by phone or text when unsure.

7. Staff and family members should be educated on the potential risks of participating in location based social media.

8. Digital pictures which are posted online must be “cleaned” of hidden location, time and device information.

9. Security and usability are a compromise; find the right balance for your family.

10. Online risks are here to stay – make your response flexible but sustainable.

Article contributed by Michael Massa of Torchstone Global. Michael consults for Torchstone Global, which discreetly serves world leading individuals, families and organizations with end-to-end risk avoidance solutions. TorchStone provides strategic security advisory services to the world-wide affluent community. For more information, please visit www.torchstoneglobal.com


Wealth Planning Group/Wealth Strategist Contact Information

PRIVATE BANKING USA

William I. Woodson (Bill)

Bill Woodson is the Managing Director for Credit Suisse’s Family Wealth Management Group, a 35-person practice that provides global investment consulting and family office services to wealthy families, private foundations and endowments. Bill is also the Director of the Center for Wealth Planning, Credit Suisse’s national center-of-excellence for providing clients with assistance in the areas of estate planning, taxation, insurance, philanthropy and wealth education. Bill came to Credit Suisse from Merrill Lynch where he was a member of Merrill Lynch’s Private Banking and Investment Group and oversaw an integrated investment advisory practice for ultra-high net worth families ranging in net worth from $25 million to $2 billion. Prior to joining Merrill Lynch, Bill was one of the first ten employees at myCFO, an integrated wealth management and technology firm started by Jim Clark (Netscape) and John Chambers (Cisco Systems). At myCFO, Bill ran one of the firm’s largest multi-family, family office practices and served as the CFO for myCFO Securities, LLC. Bill also worked as the head of a large multi-national family office with 40 employees and offices in Hong Kong, Vancouver and San Francisco. Bill began his career as a CPA at Arthur Andersen, where he spent a decade providing domestic and international tax advice to wealthy executives, families and business owners. Bill has a master’s degree in accounting from New York University’s Stern Graduate School of Business and a bachelor’s degree in economics from the University of California, Irvine. He is a frequent lecturer on wealth management and has published a number of articles on the subject. Bill co-founded and is a past president of First Graduate, a mentoring charity that helps young people finish high school and become the first in their families to graduate from college. He also served on the board of The Fulfillment Fund, a college access program for inner-city school children. Bill is a current or past member of the American Institute of Certified Public Accountants (AICPA), the Hoover Institution at Stanford University, the San Francisco and Chicago Estate Planning Councils, the Woodside School Foundation, the Investment Management Consultant’s Association, and Beta Gamma Sigma (the national honor society for graduate business schools).


Bill WoodsonManaging Director, Wealth Planning Group(312) [email protected]

West

Mark Peterson(415) [email protected]

Alpa PanchalHead, Western Region(415) [email protected]

Emily Yetter(312) [email protected]

PRIVATE BANKING USA


Emily L. Yetter

Emily L. Yetter is a Vice President in Credit Suisse’s Family Wealth Management and Center for Wealth Planning groups within Private Banking USA. As a Family CFO within Family Wealth Management, a multi-family office group, Emily works with ultra-high net worth families to coordinate financial, estate, tax, insurance and investment planning. Emily facilitates her client’s philanthropic endeavors including administration of family foundations. Emily also serves as a Wealth Strategist within the Wealth Planning group where she collaborates with the Relationship Managers in providing customized and confidential financial reviews and solutions to prospective and existing clients. Emily is based in the Chicago office of Credit Suisse. Emily began her career with Frye Louis Capital Management, Inc. in 1999. Frye Louis was purchased by Credit Suisse in 2001 and merged into Credit Suisse Securities (USA) LLC in January of 2006. Emily is a CERTIFIED FINANCIAL PLANNER™. She received her Bachelor of Arts degree from St. Olaf College and her MBA from DePaul University. Emily is a current member of the Financial Planning Association and the Credit Suisse Americas Women’s Network, a cross-divisional network of Credit Suisse employees dedicated to developing careers through educational and relationship opportunities.

Lisa Drabicki(312) [email protected]

PRIVATE BANKING USA


Lisa Drabicki

Lisa Drabicki is a Vice President in Credit Suisse's Family Wealth Management and Center for Wealth Planning groups within Private Banking USA located in the Chicago office. As a Family CFO within Family Wealth Management, a multi-family office group, Lisa works with ultra-high net worth families to coordinate financial, estate, tax, insurance and investment planning. She works closely with clients’ outside tax professionals and attorneys. Lisa also serves as a Wealth Strategist within the Wealth Planning Group where she collaborates with Credit Suisse Relationship Managers in providing customized and confidential financial reviews and solutions to prospective and existing clients. Lisa started her career at Deloitte and Touche providing financial planning and tax services to high net worth individuals. Prior to joining Credit Suisse, Lisa was a manager at RSM McGladrey advising ultra-high net worth individuals, families and business owners on estate and income tax planning and compliance.

Lisa is a Certified Public Accountant. She received her Bachelor of Science degree in Accounting and Master of Science in Taxation from the University of Illinois. Lisa is also a current member of the American Institute of Certified Public Accountants (AICPA) and the Illinois CPA Society.

Jason CainHead, Central Region(312) [email protected]

Central

Julia Chu(212) [email protected]

Alvina Lo(212) [email protected]

Sam PetrucciHead, Eastern Region(212) [email protected]

East

PRIVATE BANKING USA


Julia Chu

Julia joins Credit Suisse from UBS where she served as a wealth strategist for the Advanced Planning Group. As a resident tax and estate planning subject matter expert, she supported key client relationships with a focus on philanthropy, tax-exempt organization planning and art succession planning. She previously served at the National Endowment for the Arts, the Foundations Relations office of New York University School of Law, and the Planned Giving office of the Fashion Institute of Technology. She currently serves on the New York City Bar Committee on Art Law and on the board of the Brooklyn Arts Council. Julia received her LL.M. in Taxation from NYU School of Law, J.D. from Boston University and B.A. from Cornell University. Previous publications include: Managing CLAT Investments, What trustees need to know to effectively and responsibly oversee charitable lead annuity trusts, (Trusts & Estates, January 2011).

PRIVATE BANKING USA


Alvina H. Lo

Alvina Lo is a Vice President in Credit Suisse’s Center for Wealth Planning where she specializes in estate planning, charitable gift planning, and related tax and fiduciary matters for high net worth individuals. Alvina joined Credit Suisse in August 2009 from Milbank Tweed Hadley & McCloy, LLP where she was an associate in the Trusts & Estates Department. Alvina’s prior experience also include consulting for Deloitte Consulting and Scient Corporation.

Alvina holds a Bachelors of Science from the University of Virginia where she was a Thomas Jefferson Scholar. She received her J.D., magna cum laude, from the University of Pennsylvania, where she was a member of the University of Pennsylvania Law Review and Order of the Coif.

Alvina is a published author on estate planning matters and has lectured at the American Bar Association and New York City Bar. She is a member of the Estate and Gift Tax Committee of the New York City Bar. She is a member of the New York and New Jersey state bars. Alvina is bilingual and speaks fluent Chinese-Cantonese and fundamental Chinese-Mandarin.

PRIVATE BANKING USA


Sam Petrucci

Sam began his career at Donaldson, Lufkin and Jenrette in 1999 and joined Credit Suisse in 2000 as a result of the merger between the two firms. He is a Director in the Wealth Planning Group where his specialty is advising ultra high net-worth individuals in five key areas: estate planning, income tax planning, life insurance, philanthropy and wealth education. He holds a B.A. from the University of Pittsburgh, J.D. from Widener Law School and LL.M. in Taxation from Villanova Law School. Sam has been featured in the New York Times, quoted in the Wall Street Journal and Financial Times, presented before a number of professional organizations and written several articles on the topic of estate planning.

Nicolas Tavormina(305) 347-7594 [email protected]

Latin America

Credit Suisse Securities (USA) LLCEleven Madison AvenueNew York, NYUnited States

www.credit-suisse.com

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Perspectives: Wealth Planning Group Newsletter

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